Federated Hermes: A High-Yield Dividend Play with Strong Earnings Momentum

In the current investment landscape, high-yield dividend stocks often come with risks tied to overpromised payouts or shaky earnings. However, Federated Hermes (FHI) stands out as a compelling exception. With a 2.76% dividend yield (as of July 2025) and a 29.3% payout ratio in Q2 2025, the company's financials suggest a sustainable and growing income stream for shareholders. This article evaluates how Federated Hermes balances disciplined payout ratios, robust earnings growth, and strategic asset management to position itself as a reliable high-yield play.

Earnings Momentum and Asset Growth: A Foundation for Dividend Stability

Federated Hermes' Q2 2025 results underscore its operational strength. The company reported $1.16 in earnings per diluted share, a 480% increase from $0.20 in the same period in 2024. This surge was driven by a 6% rise in total revenue to $424.8 million and a 15% decline in operating expenses to $307.8 million. Notably, assets under management (AUM) hit a record $845.7 billion, up 8% year-over-year, with money market assets alone surging to $634.4 billion.

The key to Federated Hermes' success lies in its ability to scale revenue without sacrificing margins. The 29.3% payout ratio for Q2 2025—calculated by dividing the $0.34 per-share dividend by $1.16 in EPS—indicates that the company is retaining 70.7% of its earnings. This provides ample room for reinvestment, debt reduction, or future dividend hikes. By comparison, many high-yield stocks operate with payout ratios exceeding 100%, making them vulnerable to earnings dips.

Strategic Share Repurchases and MDT Strategies: Fueling Long-Term Value

Beyond earnings, Federated Hermes has demonstrated a commitment to shareholder value through aggressive share repurchases. In Q2 2025 alone, the company spent $64.5 million to buy back 1.547 million shares of its Class B common stock. This action not only reduces the share count but also signals management's confidence in the stock's intrinsic value.

Equally important is the growth of the company's MDT (Market Dynamic Trading) strategies, which now manage $23.2 billion in assets. These strategies, focused on equity and alternative quantitative solutions, have attracted significant inflows, particularly in microshort and ultrashort funds. These products cater to investors seeking higher yields in a low-interest-rate environment, aligning with Federated Hermes' ability to generate income even in volatile markets.

Dividend Sustainability: A 1.5x Cover and Room for Growth

A critical metric for dividend investors is dividend cover, which measures how many times a company's earnings can cover its dividend payments. Federated Hermes maintains a cover of approximately 1.5x, meaning its earnings exceed the dividend by 50%. While this is not exceptionally high, it is bolstered by the company's 9.7% quarterly dividend increase in Q2 2025 and its consistent track record of raising payouts.

The company's 2025 dividend schedule includes four quarterly payments of $0.34 per share (totaling $1.36 annually), with the next ex-dividend date set for August 8, 2025. Given its 29.3% payout ratio and rising EPS, there is significant potential for further increases.

Investment Thesis: A Balanced Approach to Income and Growth

Federated Hermes' combination of disciplined payout ratios, earnings momentum, and strategic asset management makes it an attractive option for investors seeking a high-yield dividend play with long-term stability. The company's ability to grow AUM while reducing costs and repurchasing shares enhances its earnings power and, by extension, its capacity to sustain and grow the dividend.

For income-focused investors, the 2.76% yield (close to the 2.8% referenced in the prompt) is supported by a payout ratio that leaves room for reinvestment and expansion. Meanwhile, growth-oriented investors benefit from the company's focus on MDT strategies and its track record of winning industry awards, such as the 2025 LSEG Lipper Fund Awards for fixed-income strategies.

Conclusion: A High-Yield Play with Strong Fundamentals

Federated Hermes exemplifies the ideal high-yield stock: it pays a generous dividend while maintaining financial flexibility through low payout ratios, cost discipline, and strategic reinvestment. With AUM growth, rising EPS, and a robust share repurchase program, the company is well-positioned to continue rewarding shareholders through both income and capital appreciation.

For investors seeking a high-yield dividend play with strong earnings momentum, Federated Hermes offers a compelling case. Its disciplined approach to payout ratios and asset growth suggests that the 2.76% yield is not only sustainable but has room to grow—making it a worthy addition to a diversified portfolio.